Engines spluttering on Dongfeng-Peugeot deal

By Liang Fei Source:Global Times Published: 2014-1-3 5:03:02

A Dongfeng Peugeot 2008 Photo:IC

The long-stalled Dongfeng-PSA deal finally saw some signs of movement recently. A National Business Daily report said on December 26 that the cooperation between Dongfeng and loss-making French carmaker PSA Peugeot Citroën is expected to start with Dongfeng buying into a PSA research center in Shanghai.

"The two companies are still negotiating the potential purchase," the report said, citing a source at Dongfeng Peugeot Citroën Automobile Co, the China joint venture set up by the two companies back in 1992.

The source also said that the struggling PSA is aiming at a good price for the research center, thus there would still be some bargain to do before the two parties finally inked the deal. But the source added that "the deal is expected to be announced early in 2014," according to the report.

The PSA Shanghai research center was founded in 2008, and mainly researches the Chinese market.

The source noted that the deal could help Dongfeng Peugeot Citroen Automobile Co to get access to the core technology of PSA, and also revealed that the joint venture has already started to make plans for its operation after Dongfeng buys into PSA.

"PSA would introduce more models to China after the tie-up… and the joint venture is also planning to build new plants in the future," the source said.

Government stakes

Chen Yun, a spokesman for the State-owned Dongfeng Motor Group, said that "the two companies [Dongfeng and PSA] are still in touch on the matter and Dongfeng is still conducting feasibility studies" when contacted by the Global Times on Monday, but he refused to disclose further details.

The Financial Times reported on December 12 that Wuhan-based Dongfeng and the French state will hold matching stakes of 17.6 percent in a 3 billion to 4 billion euros ($4.12 billion to $5.5 billion) capital raising plan of PSA, which will make them jointly the largest shareholders of PSA.

The capital increase will dilute the controlling Peugeot family's stake from 25 percent to 15 percent, Reuters said in a report on December 12, and US carmaker General Motors' 7 percent stake in PSA will also be diluted.

On December 12, 2013, PSA's US partner GM announced that it would sell its 7 percent stake in the struggling company, which has lead to PSA's shares tumble over 20 percent in the following week.

As one of the worst casualties of the sluggish European economy and car market, PSA had reported losses of over 510 million euros in the first half of 2013. The company did not announce its profits in the third quarter, only that its revenue dipped 3.7 percent year-on-year to 12.1 billion euros.

London-based Barclays analyst Kristina Church said in the Reuters report on December 12 that "We cannot see anything positive in today's news on Peugeot."

Now with GM out of the game, it seems that Dongfeng is the only life-saving straw left for PSA. China is also one of the few decently performing markets for PSA - the joint venture of PSA and Dongfeng announced last Friday that it has reported sales of over 550,000 units in 2013, up over 25 percent year-on-year.

GM also said that it would not stand in the way of a tie-up between Dongfeng and PSA.

Experts noted that Dongfeng is targeting the core technology of PSA in the potential tie-up, thus whether a deal can be inked mainly depends on how much the French company are willing to offer in the deal.

"The major driving force for Dongfeng to buy a stake in PSA is the prospect that it could get access to PSA's core technology after the acquisition," Zhu Bin, an auto industry analyst at Shanghai-based consultancy LMC Automotive, told the Global Times on Sunday.

However, Zhu pointed out that it still means great risks for Dongfeng to buy a stake in PSA, as "the Shanghai center only conducts some supportive research at present and the PSA technology is also not that advanced compared to its German peers."

Zhu noted that it would be very hard for Dongfeng to successfully get access to the PSA technology it wanted, given that previous tie-ups between Chinese carmakers and foreign companies did not secure technological progress.

"It could be a great opportunity for Dongfeng, but it also means great risks," he said.

"The upper hand"

Dongfeng is recently under the spotlight not only because its potential tie-up with PSA. It has also caught the public's attention as its joint venture deal with another French carmaker Renault finally got the authorities' approval.

On December 16, Dongfeng and Renault signed an agreement to jointly invest 7.76 billion yuan ($1.28 billion) in a joint venture in Wuhan, Central China's Hubei Province to produce the latter's products.

Media reports said that the joint venture will initially produce Renault's popular SUV model Koleos.

As well as cooperation with the two French companies Renault and PSA, Dongfeng currently also partners with Japanese auto brands Nissan and Honda to produce cars in China.

These joint ventures of Dongfeng are also performing well for the moment.

With the effects of the dispute of China and Japan over the Diaoyu Islands gradually fading away, auto sales of Japanese cars have been climbing.

The company's joint venture Dongfeng Nissan reported total sales of 900,000 units in 2013, up 16.4 percent year-on-year, the joint venture said on Monday.

Experts said that given over 20 years of cooperation with PSA, as well as it current cooperation with Renault, Dongfeng is the one domestic automaker that truly understands the philosophy of French companies.

"But it would not be sensible for Dongfeng to buy into PSA merely because it 'knows the French well,' after all the deal still mean great risks," Zhang Yu, managing director for Automotive Foresight (Shanghai) Co, told the Global Times on Sunday.

Zhang also pointed out that since PSA, as well as the Shanghai research center, does not have the most cutting-edge technology, and Dongfeng also has many other options to get technological support, for example, from its other partners.

"I think Dongfeng should be tougher in the negotiation with PSA," said Zhang, noting that Dongfeng has an upper hand in the negotiation.

Zhang believes the fact that French government may also own a stake in PSA has further complicated the deal.

"The risks are clear. I hope that Dongfeng could get what it wants at a reasonable cost," he said.